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How we calculate affordability

Total debt-to-income (DTI) ratio

FHA vs. conventional loan

How we calculate affordability

To calculate your general affordability range, we take into account a few primary items, such as your household income, monthly debts (for example, car loan and student loan payments) and the amount of available savings for a down payment. That said, as a home buyer, it's important to have a certain level of comfort in understanding your monthly mortgage payments. While your household income and monthly debts may be relatively stable, your overall savings and how much you wish to allocate toward your home can vary depending on how much you want to set aside for a rainy day or how much you want to set aside for a future expenditure.

A good rule of thumb is to have three months of your housing payments, including your monthly expenses, in reserve. This will give you an additional buffer in case there is some unexpected event.

To calculate your general affordability range, we take into account a few primary items, such as your household income, monthly debts (for example, car loan and student loan payments) and the amount of available savings for a down payment. That said, as a home buyer, it's important to have a certain level of comfort in understanding your month...

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Total debt-to-income (DTI) ratio

An important metric that your bank uses to calculate the amount of mortgage you can borrow is the DTI ratio, or simply put, the ratio of your total monthly debts (for example, your mortgage payments including property and tax payments) to your monthly pre-tax income. Depending on your profile and lending resource, you may be qualified at a higher ratio closer to 43%. We recommend that your total monthly spend for housing and debts should not exceed 36% of your monthly income in order to provide you with a safe cushion.

An important metric that your bank uses to calculate the amount of mortgage you can borrow is the DTI ratio, or simply put, the ratio of your total monthly debts (for example, your mortgage payments including property and tax payments) to your monthly pre-tax income. Depending on your profile and lending resource, you may be qualified at a higher r...

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FHA vs. conventional loan

In considering your available savings for a down payment there are specific loan types to
consider. We've made the assumption that if you have at least a 20% down payment, you would
be better fit for a conventional loan and anything less (down to a minimum of 3.5%) would
be considered for a FHA loan. For more on the types of mortgage loans, see Selecting the Right Mortgage.

In considering your available savings for a down payment there are specific loan types to
consider. We've made the assumption that if you have at least a 20% down payment, you would
be better fit for a conventional loan and anything less (down to a minimum of 3.5%) would
be considered for a FHA loan. For more o...

See all

Affordability 101

If you earn $56,516, the average household income, you can afford $1,695 in total monthly payments, according to the 36% rule. The rule, which measures your debt relative to your income, is used by lenders to evaluate how much you can afford.

Income – Money that you receive on a regular basis, such as your salary or income from investments. Your income helps establish a baseline for what you can afford to pay every month.

Funds available – This is the amount of cash you have available to put down and to cover closing costs. You can use your savings, investments or other sources.

Debt and expenses – It's important to take into consideration other monthly obligations you may have, such as credit cards, car payments, student loans, groceries, utilities, insurance, etc.

Credit profile – Your credit score and the amount of debt you owe influence a lender’s view of you as a borrower. Those factors will help determine how much money you can borrow and what interest rate you’ll be charged. Check your credit score.

When banks evaluate your affordability, they only take into account your outstanding debts. They do not take into consideration if you want to set aside $250 every month for your retirement or if you're expecting a baby and want to set aside additional funds. NerdWallet's Affordability Calculator helps you easily understand how taking on a mortgage debt will affect your expenses and savings.

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